What Is The Difference Between Debt Mutual Funds And Bank Fixed Deposits?

Updated: Wednesday, April 27, 2016, 8:53 [IST]

There is always a predicament when it comes to investing in fixed interest yielding securities. Will I get higher returns? Are they tax free? How can I maximize yields?

Debt funds or bank fixed deposits?

These days with interest rates dropping and yields following suit, investors have to chase high yielding fixed income securities.

Can Debt Mutual Funds Give Better Returns Than Bank Deposits?

There has always been a choice between so many instruments including tax free bonds, company deposits, bank deposits and debt mutual funds.

Difference between debt mutual funds and bank fixed deposits

1) Overall yields

Debt funds invest your money in high yielding government securities, corporate deposits, corporate bonds, NCDs etc. The investment choice is in highly safe AAA instruments, which are rated by the various credit rating agencies.

There is not much of a difference when it comes to returns from debt funds vs bank deposits. Since an individual can invest in these directly or through the debt fund, the returns are almost identical. We believe that the yields could be slightly lower in the case of debt mutual funds, before taxation.

2) Post tax yield could be higher in debt mutual funds

Debt mutual funds have a slight advantage when it comes to post tax yields. If you hold them for more than three years, you are taxed at 20 per cent after indexation. So, effectively you may end-up paying very little tax after indexation.

However, if you hold for less than 3 years, short term capital gains according to the tax slab would apply.

difference between short term capital gains and long term capital gains difference between short term capital gains and long term capital gains

On the other hand, if you invest in bank fixed deposits, the interest income would be added to your total income and you would be taxed according to your tax bracket.

3) TDS

Another difference between debt mutual fund and bank fixed deposit is that there is no TDS on debt mutual funds. On the other hand bank fixed deposits attract a TDS, if the interest amount exceeds Rs 10,000.

4) Form 15G and Form 15H

You can submit either form 15G or form 15H, as the case maybe, in the case of bank deposits. There is no such benefit, in the case of debt mutual funds, as there is no TDS deducted in the first place.

5) Bank deposits offer better liquidity

Debt mutual funds are not as liquid as Bank deposits. If you opt for online redemption of a bank fixed deposit, it is instant, while it could take a day at the very least, until you get your money after redemption from a debt mutual fund scheme.

6) Switching of your money

The one advantage of the debt mutual funds is that you can switch from one scheme to another. Say for example, if interest rates are falling, you could move money to equity mutual funds by the switching that is allowed by mutual funds from one scheme to another.

The move money from bank fixed deposits to mutual funds, you would first have to redeem the amount and than buy a equity mutual fund scheme.

7) Exit load

Another difference between a debt mutual fund and a bank fixed deposit is that the latter has an exit load, depending on when you exit. If you exit before 1 year, an exit load of 1 per cent could apply.

8) Pre-closure charges

Bank fixed deposits levy a penalty of 1 per cent, if you redeem and break the fixed deposit early, while in the case of mutual funds, as mentioned earlier there is an exit load.

Making a choice between debt mutual funds and bank fixed deposits

We still believe that company fixed deposits would be the best in terms of yields, if you are opting for very safe company fixed deposits. For example, Bajaj Finserv, Mahindra Finance and KTDFC Fixed deposits are safe and can offer you much better yields than debt mutual funds and bank fixed deposits.

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